At a meeting this week, we had this very bright person come in to give us an update on a project that had been going on forever. He is definitely smart: he is fluent in several languages, has extensive experience in his domain and has very good presentation skills. In all honesty, he’s got a very strong resume.
But there’s one problem.
If he gets slightly distracted, it will take him forever to get anything done.
To keep our own projects on-track, we need to make sure his own projects don’t get delayed. We keep track of everything he’s involved in. We clarify the goals, the timelines, the expectations and we regularly follow-up. It is a little time consuming, but it’s an investment. In the long run, it will be well worth it.
Well, as it turns out, that’s also exactly how I manage my investments.
Are My Investments Actually Doing Any Work?
Investments can also get distracted and put us off-track. A new fee comes up, a portfolio becomes unbalanced. There’s a multitude of reasons we want to make sure our investments actually deliver.
So on a yearly basis, to keep my investments under control I calculate the 5 numbers that I need to track to reach Financial Independence. This has been very helpful for me and my wife to zoom out and see how our finances look from 10,000 feet.
I don’t know about you, but the way I designed my plan to reach financial independence by 2021 is extremely simple. I used only 2 variables:
- How much can I save on a yearly basis,
- How much return I expect from my portfolio every year.
I thought to myself that if I track my yearly savings, I probably also need to keep an eye on the actual returns!
My thoughts were confirmed when I saw this chart from JPMorgan, showing the difference between a 2.25% ROI and a 6.5% ROI, here the blue and the green lines:
Saving is important, but knowing how hard our investments are working is equally critical.
What’s your Return On Investment?
The way I calculate my ROI is very simple and I need only 3 values:
- My Net Worth at the beginning of the year (Net Worth Start),
- My Net Worth at the end of the year (Net Worth End),
- How much I have added to my investments (Contributions).
I then calculate the ROI as follows:
ROI = (Net Worth End – Net Worth Start – Contributions) / Net Worth Start.
A few examples, if you start the year with 100,000$ and you end it with 120,000$.
- If you have contributed 0$, the ROI is 20%
- If you have contributed 20,000$, the ROI is 0%
- If you have contributed 5,000$, the ROI is 15%
- if you have contributed 25,000$, the ROI is -5% (ouch)
For example, in 2015, my ROI was 5.2%.
This was clearly not an amazing return, but it was also not too far from the 6% I had used to project my FI date. The stock market didn’t generate any return last year, my Oil and Gas stocks got slammed and the returns mostly came from my 401k.
This allows me to check if my financial plan is on track.
Have you also used a 6%-8% yearly return to project your financial plans? How do you keep track of this number, do you use the ROI calculation?